General Purpose Frameworks
What is the form and content of the auditor’s report on financial statements that are prepared using a different general purpose financial reporting framework?
Background
1. This Q&A addresses the form of the auditor’s report with respect to the following circumstances where financial statements are prepared in accordance with a general purpose financial reporting framework:
(a) financial statements prepared in accordance with a general purpose financial reporting framework other than a financial reporting framework in the CPA Canada Handbook –
Accounting or the CPA Canada Public Sector Accounting Handbook;
(b) financial statements prepared in accordance with a financial reporting framework in the CPA Canada Handbook –
Accounting that is not designed for that type of entity;
(c) financial statements for a specific purpose prepared in accordance with a general purpose financial reporting framework;
(d) consolidated and non-consolidated financial statements prepared in accordance with a financial reporting framework that permits both such statements to be prepared for general purposes;
(e) two sets of financial statements prepared in accordance with different accounting policy choices within the same financial reporting framework (including consolidated and
non-consolidated financial statements prepared in accordance with a financial reporting framework that does not expressly permit both such statements to be prepared for general purposes).
2. In the discussion of each circumstance in this Q&A, it has been assumed that the auditor has determined the applied financial reporting framework to be acceptable in accordance with paragraph 6(a) of CAS 210, Agreeing the Terms of Audit Engagements, unless otherwise indicated.
3. Reference is also made in this Q&A to the following paragraphs in CAS 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report:
(a) paragraph A8, which indicates that the auditor may include an Other Matter paragraph in the auditor’s report, referring to the fact that another set of financial statements has been prepared by the same entity in accordance with another general purpose financial reporting framework and that the auditor has issued a report on those financial statements; and
(b) paragraph A9, which indicates that in circumstances where financial statements are prepared for a specific purpose using a general purpose framework, since the auditor’s report is intended for specific users, the auditor may consider it necessary in the circumstances to include an Other Matter
paragraph stating that the auditor’s report is intended solely for the intended users, and should not be distributed to or used by other parties. Therefore, the auditor may add such an Other Matter paragraph to the auditor’s report. Financial statements prepared for a specific purpose are distinguished from special purpose financial statements that, as defined in paragraph 6(a) of CAS 800, Special Considerations — Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, are financial statements prepared in accordance with a special purpose framework.
4. In the circumstances where the entity prepares special purpose financial statements, and management has a choice of financial reporting frameworks in the preparation of such financial statements, paragraph 13(b) of CAS 800, requires that the
explanation in the auditor’s report of management’s responsibility for the financial statements also make reference to its responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances.
5. In the circumstances where the auditor is requested to report on financial statements prepared in accordance with a financial reporting framework other than the framework required by the entity’s incorporating or other governing legislation, the auditor may discuss the matter with management and, where appropriate, those charged with governance, as required by paragraph 19 of CAS 250, Consideration of Laws and Regulations in an Audit of Financial Statements. For example, the auditor may indicate that:
(a) the financial statements do not comply with and will not satisfy the entity’s incorporating or other governing legislation;
(b) those charged with governance should consider the financial and other implications of such non-compliance and may wish to obtain legal advice; and
(c) the auditor accepts no responsibility for any implications of potential non-compliance with the incorporating or other governing legislation.
Reporting on financial statements prepared in accordance with a general purpose financial reporting framework other than a financial reporting framework in the CPA Canada Handbook – Accounting or the CPA Canada Public Sector Accounting Handbook
6. In Canada, the accounting standards promulgated by the Accounting Standards Board and the Public Sector Accounting Board are generally accepted and often are prescribed in incorporating or other governing legislation as the applicable financial reporting framework. They are considered to be general purpose financial reporting frameworks for the type of entity for which the framework was designed.
7. A financial reporting framework other than the financial reporting frameworks in the CPA Canada Handbook – Accounting or the CPA Canada Public Sector Accounting Handbook may be acceptable in certain circumstances, however. Examples where a financial reporting framework other than the financial reporting frameworks in the CPA Canada Handbook – Accounting or the CPA Canada
Public Sector Accounting Handbook may be acceptable for
general purpose financial statements would be when legislation or regulation permits an entity to report in accordance with US GAAP.
In these circumstances, the form of the auditor’s report would be in accordance with CAS 700, Forming an Opinion and Reporting on Financial Statements.
8. It is possible that such an entity may prepare two sets of financial statements for general purposes, one prepared in accordance with a financial reporting framework in the CPA Canada Handbook – Accounting or the CPA Canada Public Sector Accounting Handbook and one set prepared in accordance with a different financial reporting framework. In this case, the auditor may
consider adding the Other Matter paragraph referencing the other set of financial statements prepared by the same entity, referred to in paragraph 3(a) of this Q&A.
9. In determining whether the applicable financial reporting framework is acceptable for the engagement under CAS 210, Agreeing the Terms of Audit Engagements, the auditor may determine that the financial statements are prepared for a specific purpose. In addition, the auditor may consider adding an Other Matter paragraph to the auditor’s report stating that the auditor’s report is intended solely for the intended users, and should not be distributed to or used by other parties, as discussed in paragraph 3(b) of this Q&A.
Reporting on financial statements prepared in accordance with a financial reporting framework in the CPA Canada Handbook – Accounting that is not designed for that type of entity
10. As discussed in paragraph 6 of this Q&A, the accounting standards promulgated by the Accounting Standards Board and the Public Sector Accounting Board are considered to be general purpose financial reporting frameworks for the type of entity for which the framework was designed. The Preface to the CPA Canada Handbook – Accounting provides guidance on determining which financial reporting framework applies to a reporting entity. All types of entities may apply International Financial Reporting Standards. However, the financial reporting frameworks in Parts II to IV of the CPA Canada Handbook – Accounting may only be applied by entities that meet the definitions of entities for which these financial reporting frameworks have been designed.
11. In some circumstances, an entity may request an auditor to report on financial statements prepared in accordance with a financial reporting framework that is not designed for that type of entity.
For example, a publicly accountable enterprise may prepare financial statements in accordance with Canadian accounting standards for private enterprises. In determining whether the applicable financial reporting framework is acceptable for the engagement under CAS 210, the auditor would identify the purpose of the financial statements, the intended users and the steps
taken by management to determine that the applicable financial reporting framework is acceptable. If the financial statements
prepared in accordance with such a framework are intended as the entity’s general purpose financial statements, the auditor would not accept an engagement to report on such financial statements because such a financial reporting framework is not an acceptable framework for general purpose financial statements for that type of entity. However, if such financial statements are prepared for a specific purpose (for example, to meet the needs of a particular stakeholder), such a financial reporting framework may be an acceptable special purpose framework. In this case, the auditor would report in accordance with CAS 800.
Reporting on financial statements prepared for a specific purpose in accordance with a general purpose financial reporting framework designed for that type of entity
12. An entity may prepare financial statements for a specific
purpose in accordance with a general purpose financial reporting framework designed for that type of entity. For example, a private enterprise may prepare non-consolidated financial statements in accordance with Canadian accounting standards for private enterprises (as permitted by Subsidiaries, paragraph 1590.15 in Part II of the CPA Canada Handbook – Accounting) to meet the expressed needs of a bank and the income tax authorities.
13. CAS 800 defines a special purpose framework as a financial reporting framework designed to meet the financial information needs of specific users. Special purpose financial statements are financial statements prepared in accordance with a special purpose framework. When financial statements are prepared for a specific purpose in accordance with a general purpose framework, the financial statements do not meet the definition of special purpose financial statements in CAS 800.
14. Although the financial statements are prepared for a specific purpose, the auditor would report on such financial statements in accordance with CAS 700 as the financial reporting framework is a general purpose framework. The auditor may consider adding the Other Matter paragraph stating that the auditor’s report is intended solely for the intended users, and should not be distributed to or used by other parties referred to in paragraph 3(b) of this Q&A.
15. See Illustrative Report 3(e) in this Guide for an example of an auditor’s report on financial statements prepared for a specific purpose in accordance with a general purpose financial reporting framework.
Reporting on consolidated and non-consolidated financial statements in accordance with a general purpose financial reporting framework that permits both such statements to be prepared for general purposes 16. Some general purpose financial reporting frameworks permit
an entity to prepare both consolidated financial statements and non-consolidated financial statements for general purposes and indicate that they have been prepared in accordance with the financial reporting framework. See, for example, IAS 27 Consolidated and Separate Financial Statements in Part I of the CPA Canada Handbook – Accounting.
17. In this circumstance, the auditor would report on each set of financial statements in accordance with CAS 700. The financial statements would be labelled in the auditor’s report in the same manner in which they are required to be labelled by the financial reporting framework. Where the financial reporting framework does not contain specific labelling requirements, the auditor would generally describe the financial statements as being “consolidated”
financial statements and “non-consolidated” financial statements (or a similar term), respectively.
18. The auditor may consider adding the Other Matter paragraph referencing the other set of financial statements prepared by the same entity referred to in paragraph 3(a) of this Q&A to the auditor’s report on each set of financial statements, if this is practicable. The following is example wording of an Other Matter paragraph that may be included in the auditor’s report on consolidated (separate) financial statements when an entity also prepares separate (consolidated) financial statements under IAS 27 Consolidated and Separate Financial Statements:
Other Matter
ABC Company has prepared a non-consolidated (consolidated) set of financial statements for the year ended December 31, 2011 in accordance with International Financial Reporting Standards on which we issued an auditor’s report to the shareholders of ABC Company dated March 31, 2012.
Reporting on two sets of financial statements prepared in accordance with different accounting policy choices within the same financial reporting framework (including consolidated and non-consolidated financial statements)
19. General purpose financial reporting frameworks generally
contemplate an entity preparing only one set of general purpose financial statements in accordance with that financial reporting framework. Therefore, an entity would select only one set of accounting policies in any particular period for purposes of preparing such general purpose financial statements.
20. In some circumstances, an entity may prepare additional sets of financial statements using alternative accounting policies that are also in accordance with a particular financial reporting framework.
For example, the entity may prepare:
(a) one set of financial statements making an accounting policy choice to prepare financial statements on a consolidated basis as permitted by Subsidiaries, paragraph 1590.15(a) in Part II of the CPA Canada Handbook – Accounting; and one set of financial statements making an accounting policy choice to prepare financial statements on a non-consolidated basis as permitted by paragraph 1590.15(b); or
(b) one set of financial statements making an accounting policy choice to account for income taxes using the taxes payable method, as permitted by Income Taxes, paragraph 3465.03(a) in Part II of the CPA Canada Handbook – Accounting; and
another set of financial statements making an accounting policy choice to account for income taxes using the future income taxes method, as permitted by paragraph 3465.03(b).
21. In accepting an engagement to report on two sets of financial statements prepared in accordance with different accounting policy choices within the same financial reporting framework, the auditor would request the entity to designate one set of financial statements as being its general purpose financial statements for a broad range of users and the other set as being for a specific purpose. Generally, the general purpose set of financial statements would be the set of financial statements that provides the most reliable and relevant information about the effects of transactions, other events or conditions on the entity’s financial position,
financial performance or cash flows. The auditor would report on these financial statements in accordance with CAS 700. The auditor would report on additional sets of financial statements prepared in accordance with the same financial reporting framework in accordance with paragraphs 12-15 of this Q&A on the basis that the financial statements are prepared for a specific purpose in accordance with a general purpose framework. The auditor may consider adding either or both of the Other Matter paragraphs referred to in paragraphs 3 of this Q&A.